Missing the Story

A longtime reporter and author says journalists are largely ignoring the way new laws and regulations are enriching big business at the expense of consumers. Thurs., March 28, 2013.

By David Cay Johnston David Cay Johnston (davidcay@me.com) spent four decades in daily journalism, reporting for, among others, the New York Times, the Philadelphia Inquirer and the Los Angeles Times. The author, most recently, of The Fine Print, he writes columns for Tax Analysts and Columbia Journalism Review.

Journalists are missing one of the biggest stories in America: the saga of how new laws and regulations are promoting monopolies, duopolies and oligopolies, to the massive detriment of consumers.

Telling this story doesn't require serious investigative skills or sophisticated computer-assisted reporting. All you have to do is cover the nuts and bolts. Many of the most important changes are made at regulatory agencies, which generally receive scant coverage even though their decisions affect prices, the quality of goods and services,
and taxes.

Consider these developments:

 Lawmakers in Alabama, California, Florida, Texas and Wisconsin passed laws revoking the right of every American to have landline telephone service, a right that has been in place for 100 years, while other states now restrict it.

 After a business professor testified that "the stupidest things" AT&T and Verizon could do would be to "start jacking up local service" prices if California lifted price caps, the caps were removed  and the companies promptly raised prices as much as 600 percent.

 New Jersey lawmakers required Verizon to wire 70 cities with fiber optic lines but did not require it to provide service, so people who wanted to negotiate where holes would be punched in their walls are out of luck.

 Asserting that competitive markets would make electricity cheaper, New York legislators authorized Energy Supply Companies, or ESCOs, to pitch consumers. But they did not require benchmarking, so people cannot determine if they are saving money or shelling out more.

 Electric utilities in 25 states pocketed about $30 billion that customers prepaid for corporate income taxes that government will never collect.

 A 1980 law to promote railroad competition resulted in 37 big lines consolidated into six under rules that let them charge higher monopoly prices, even when two rails run parallel for a thousand miles.

All of these stories went unreported or got only spotty and superficial coverage. What coverage there was often incorrectly characterized these changes as benefits to consumers rather than a shift in government policy that favored companies over their customers.

These new laws and administrative rules are just part of the much larger story about fundamental changes to the rules of commerce, some of which date back thousands of years, that are remaking the American economy.

These new rules, promoted by some of the biggest companies in America and their trade associations, thwart the competitive market.

These and other episodes involving anti-competitive rules are the subject of my latest book, "The Fine Print," which I wrote because of my concern  indeed, alarm  that a wholesale remaking of the rules of commerce is underway in America, and my peers are missing it or, in some cases, misreporting it.

To be sure, reporting on the trend toward "deregulation" has been common since the late 1970s.

"Deregulation" is a misnomer be-cause, literally, no such thing exists in commerce, as I teach my law and graduate business students at Syracuse University.

Everything in business is regulated in some fashion, and has been since long before the first nearly full set of laws we have, Hammurabi's Code from almost 38 centuries ago. That ancient law covered everything from building codes and social insurance to techniques for weighing defenses against embezzlement and other financial crimes.

To appreciate how pervasive regulation is in our society, consider baseball, an enjoyable activity but hardly of life-or-death importance. Major League Baseball, as well as Little League, regulate how many stitches are on the ball.

Deregulation typically means reregulation under new rules that favor business interests.

Regulations can, and should, change as knowledge, technology and other conditions change. What journalists should do is focus on whether the new rules balance the interests of customers with those of the businesses providing goods and services, or are one-sided.

Here is a simple test to apply after new regulations are adopted  did prices fall or rise more slowly? Or did they rise faster than similar prices elsewhere? In a competitive market the pressure is on lower prices, but in oligopolies companies have more freedom to raise prices  and they do.

The costs of these new rules are enormous. Take that railroad industry rule on monopoly pricing. It costs the people of Lafayette, Louisiana, $6.5 million more than if they paid competitive shipping prices for coal brought from Wyoming to their municipal electricity plant. Eliminating the monopoly overcharge would be the equivalent of a 10 percent cut in property taxes.

In my book "Free Lunch," I explained how rules for new electricity markets actually tend to raise prices to levels almost as high as what an unregulated monopoly could charge. Those rules, not coincidentally, were written by Enron.

The six untold or little-told stories cited at the beginning of this article are just examples of a multitude of pocketbook stories missed by reporters in our state capitals and Washington, on Main Street and on Wall Street, especially in the business section. We should be pursuing such stories with vigor.

These changes get missed or misreported in part because, in the framing of the great newspaper editor Gene Roberts, instead of emerging in an official announcement, they "ooze."

Part of the problem is that far fewer reporters are covering important departments and agencies in Washington, D.C., as well as the 50 state capitals, according to detailed surveys by AJR.

A jaundiced view of the phenomenon comes from Professor Rena Steinzor of the University of Maryland Law School, who has tried for years to get journalists to write about rules that she has shown cause unnecessary dangers and deaths, including those of migrant children working on farms and people living downstream from coal ash impounds.

"The press is dying," she says, describing a vicious cycle in which she says more and more significant stories are ignored, resulting in less knowledge for the public, and a growing roster of unsolved problems due to a lack of focused
public attention.

Joyce Cutler, who covers regulation in California for Bloomberg's Bureau of National Affairs, says she is often the only journalist covering important consumer issues, and she does so for a professional rather than a general audience.

"I cannot think of an agency that covers more people in more parts of their life than the state Public Utilities Commission, and yet it gets ignored," she says.

Many consumer advocates complain that editors and producers rely too much on general assignment reporters. "The problem is not so much a lack of investigative reporting as [a lack of] beat reporting," says Jon Fox of the California Public Interest Research Group. "What we need are reporters with the time and attention to really learn issues and report on them deeply."

Covering stories affecting consumers is not difficult. There is an abundant public record to mine. Plenty of sources remain eager to be interviewed, even if company executives may not be. The audience cares when such news is reported because it hits them in the pocketbook. And journalists, consumers themselves, can grasp from their own experience the impact on their lives.

But that hardly means getting the go-ahead to pursue consumer news is easy. Advertisers, while they generally have no direct influence in the newsroom, make their dislike of consumer reporting known to publishers and high level editors in ways subtle and sometimes influential.

And in too many newsrooms there is a strong bias against stories that require initiative and enterprise rather than reacting to events. Today's smaller staffs and the proliferation of duties  blog posts, tweets, etc.  only compound the problem.

Suggesting a series on electricity pricing is likely to make editors and producers roll their eyes. I know. The last series I wrote for the New York Times was on electricity prices, and editors resisted both the idea and its execution, running only seven of my 10 planned pieces. Yet those pieces, some of which ran on the front page, got a huge reader response because the stories touched people in meaningful ways.

In the 1970s I had the same experience at the Los Angeles Times. Yet stories I wrote on electric and telephone pricing and in-state airfares often made page one not just at my paper but also at clients of the now-defunct Los Angeles Times-Washington Post News Service.

Critical to covering these issues is perspective. News organizations tend to cover banking through the eyes of bankers, not their customers, even though few people own banks while most people have bank accounts. Likewise, casino coverage focuses on what the relatively few temples of chance win, not what the millions of players lose, which is the same figure.

Then there are the airline mergers, which over three decades have reduced the market to three big carriers  United, Delta and soon American after its merger with US Airways.

News reports often pay much more attention to the interests of airline shareholders, who can expect better returns after mergers, than the vastly larger universe of travelers, who can expect higher prices.

Consolidations, monopoly prices and reductions in service are all made possible by government through laws and regulations.

When new rules do make the news, they are often presented as strengthening competitive markets. That they are not is made clear by a simple fact  competitive markets tend to bring about lower prices, yet these policies often produce higher prices while reducing or eliminating consumer rights.

Companies that benefit from these rules are sometimes ruthless in their determination to expand them and suppress coverage.
AT&T assigned an executive full-time just to monitor David Lazarus of the Los Angeles Times when he was the San Francisco Chronicle consumer columnist.

When Marty Schladen wrote about rising prices of electricity for the Galveston County Daily News in Texas, the Reliant electric utility in Houston had multiple executives and publicists complain to his bosses about each story.

The companies failed to show any flaws in the work of Lazarus or Schladen. Rather, they were engaged in a technique I call poisoning the well.

By mau-mauing editors, they complicate vital newsroom relationships. Each time a reporter proposes a story that is sure to elicit complaints, even baseless ones, it means top editors must take time to listen, inquire and respond.

One utility, Entergy, went much further. Using a pretext, it tried to jail an independent electric bill auditor who for three decades has caught the company overcharging cities, companies and nonprofits tens of millions of dollars. The auditor, Joe Seeber, escaped 45 days behind bars only because just as a New Orleans judge was about to issue his order, he asked the lone spectator in the courtroom to identify himself.

The judge's tone shifted markedly after I identified myself as a staff writer for the New York Times. Minutes later, Entergy's lawyer told me I had no business reporting on the matter, a point evidently made with success locally as every New Orleans news outlet ignored this exercise of corporate power against an auditor with a solid track record.

Companies argue that reducing or eliminating regulatory oversight by utilities boards should put downward pressure on prices. But the economics of utilities can have the reverse effect, which has been documented by decades of economic research and pricing records.

The California Division of Ratepayer Advocates  the specialists who look out for consumers  addressed this issue in a 2010 report when AT&T and Verizon sought to eliminate all regulation of the prices they charge and to end their duty to serve rural and poor urban areas. The report stated:

"Instead of prices being influenced by market forces resulting from thriving competition, prices appear to be based on 'marketing' forces  that is, prices have been raised by marketers to encourage switching to more expensive bundles of services, which are unregulated.. DRA firmly believes, and all the evidence demonstrates, that prices for basic residential service will rise when the carriers are allowed total pricing freedom."

Later, a legislative report showed how the two phone companies jacked up prices, in some cases by 600 percent. AT&T even started charging $15 a year to keep a name out of the telephone directory.

Searches of Nexis, Factiva and other databases turn up exactly no articles citing the Ratepayer Advocates' report warning of higher prices.

Imagine what a great story you would have if Congress had enacted a sneaky law to make you give other people money to pay their income taxes. Now imagine that Congress exempted from the income tax the very people who got this money.

Well, that is just what happens with one industry, thanks to so-called deregulation. You and everyone else pay this tax every time you put gas in your car. The most astonishing part of this tax story is that it is imposed not by Congress, but by regulation.

The simple story is that Congress in 1986 exempted monopoly pipelines from the corporate income tax if they organized themselves as Master Limited partnerships. The George W. Bush administration then let these pipelines include the nonexistent tax in the rates they charge.

The cost of this fake tax is both tiny and huge.

The pipelines raise prices to cover the cost of the tax, which in turn means they have to raise prices even more to cover the taxes on the extra earnings, known as "grossing up." A 42 percent tax on profits, grossed up, means a pipeline gets to earn its profit plus 75 percent for taxes. These higher costs are then built into prices people pay for gasoline and natural gas to heat homes.

Paying this fake tax costs each American less than three cents per day, about $10 per year, I calculate. That is the tiny part. The huge part is that collecting just a penny a day from everyone in America adds up to $1.1 billion in a year  or $3.3 billion at three cents per day per American.

This is just one of many stories of price gouging that lie open in the public record waiting for journalists to find them.

For those who doubt reporting would make a difference, consider this: When I wrote a brief item for State Tax Notes and tax.com about how California regulators were going to include this fake tax for one in-state pipeline, three readers asked to speak at a regulatory hearing. That alone killed the proposal, saving Californians $9 million a year.

Here is an example of a story that should astonish: In 21 states, companies can make deals to pocket the state income taxes withheld from their workers' paychecks. In effect, these corporations are taxing their workers, making them pay for new equipment or just bonuses for the bosses.

Ford Motor, Goldman Sachs, Procter & Gamble and more than 2,700 other companies have such deals. What makes them especially attractive to the companies, and at the same time a great news story, is that workers are not told about the diversion of their taxes from public purposes to corporate benefit.

That is because the laws authorizing these deals say that once the taxes are withheld from paychecks, the workers have fulfilled their obligation and the fact that the company gets the money is treated as a separate (and in some states confidential) matter.

Billions of dollars already have been diverted through this stealth mechanism. Unless the practice is stopped, I expect it to eventually be in place in all or nearly all of the other 22 states with an income tax. But news coverage has been spotty to nonexistent.

The shift away from competitive markets to insulating favored companies from the rigors of the marketplace should be one of the most important news
stories in America. Yet when my research assistants and I dug through news databases like Nexis and Factiva, we found almost nothing. What was reported by major newspapers, magazines, Web sites and broadcast news organizations about new rules that favor monopolies, duopolies and oligopolies was like scattered dots here and there that no one had connected, even to provide the most rudimentary outline.

But while news reports have missed the connections, Wall Street financial analysts get it. These analysts understand that when competition is absent or minimal, companies can charge higher prices and offer a lower quality of goods and services than they could in a competitive market. There is even a word for legal barriers to competition  moats.

Moats are barriers companies erect, through government laws and regulations, that make it difficult to impossible for competitors to enter the business successfully.

But how much does this concept affect news reports? How often do stories about companies reporting large profits even consider anti-competitive policies?

Journalists who want to grab readers by their wallets, who want to make their stories so valuable that people pay attention need only make one change in how they report the news: Balance business news coverage focused on the minority of people who are investors with the viewpoint of the majority of people who
are customers.